California judge strikes down state’s board diversity law

As part of a 2020 lawsuit that objected to the new law as unconstitutional, Judge Terry Green ruled Friday that creating quotas on public company boards for members of a particular race, ethnicity, or sexual preference violated the state constitution. He agreed with the arguments regarding the law’s constitutionality put forth by Judicial Watch, the nonprofit conservative group that filed the lawsuit.

The judge also barred the state of California from spending any money to enforce the law.

“This historic California court decision declared unconstitutional one of the most blatant and significant attacks in the modern era on constitutional prohibitions against discrimination,” said Judicial Watch President Tom Fitton in a statement. “In its ruling today, the court upheld the core American value of equal protection under the law.”

The ruling could be seen as striking a blow against an emerging trend of state legislation aimed at ordering companies to admit more women and minorities to corporate boards long dominated by white men. A 2018 California law ordered public companies in the state to have at least one female board member by the end of 2019. That law has also been challenged in court by Judicial Watch; a trial in the lawsuit was recently completed, but the verdict has not been announced.

In 2021, the Securities and Exchange Commission (SEC) approved a “comply or explain” mandate for board diversity proposed by Nasdaq. Under the SEC’s approval order, Nasdaq-listed companies, subject to certain exceptions, are encouraged to have at least two “diverse” directors, including at least one who self-identifies as female and at least one who self-identifies as either an “underrepresented minority or LGBTQ+,” terms of which are defined in the approval order.

Failure to adhere to the terms of the mandate could lead to a company being delisted.

In 2020 comments regarding the Nasdaq proposal, Judicial Watch said the rule would violate the Fifth Amendment of the Constitution because it would ”require companies listed on Nasdaq to discriminate and will likely lead to extensive litigation.” Public companies are expected to begin complying with the rule later this year by filing board-level diversity data and, if their board does not have two minority members, an explanation as to why.

Some experts said the California decision was unlikely to slow down calls from the public and investors that corporate boards be more diverse.

“The ruling does nothing to stem the strong investor and cultural demand for more representative directors,” said Chris Davis, chair of Kleinberg Kaplan’s investor activism and mergers and acquisitions practices. “Whether that pressure comes from self-regulatory organizations or institutional holders, calls for board diversity will intensify, not wane.”

Prior to outside enforcement of board diversity mandates, change was “somewhere between glacial and nonexistent,” he said.

“Encouragement did not succeed moving the needle on diversity,” said Davis. “It has taken laws and regulations—such as the Nasdaq listing requirement on gender and ethnicity diversity targets—to get boards to act.”